Relationships between investment banks and sophisticated investors will be
watched far more closely in future, according to the Financial Services
Authority (FSA), Britain's top financial regulator.

Hector Sants, chief executive of the FSA, on Monday laid out dramatic changes to the way UK-based financial firms are regulated as part of a shake-up of the country's main regulators.

From April next year, the FSA will begin separating its risk and supervision teams into those that will work for the two new regulators being created out of the City watchdog, ahead of full separation sometime in the second half of 2012.

Mr Sants said the regulator would begin to use a "twin peaks" style of regulation in the interim as he gave details of a more intrusive approach in future.

Discussing the new Consumer Protection and Markets Authority (CPMA), Mr Sants revealed that the new regulator would have the power to throw a light on the often murky relationships between big banks and institutional investors.

"I believe that the CPMA should be prepared to intervene early to deal with emerging wholesale conduct issues that threaten market integrity, particularly where these have a link to retail markets and consumers, and if necessary develop additional regulatory requirements for wholesale market participants where market discipline alone is not delivering appropriate standards," said Mr Sants.

In the past the FSA has left alone investment banks and large investors, reckoning that they are capable of protecting their own interests, but the latest comments are likely to cause fears in the City of more intrusive oversight from regulators, according to Michael McKee, the partner heading up DLA Piper's financial services regulatory practice.

"The FSA has focused less on wholesale conduct of business issues in the past because the clients tend to be experienced professionals but clearly their intention is to intensively regulate them going forwards," said Mr McKee.

On the flipside, Mr Sants said that "lower impact" firms would be less intensively regulated during the transition period as more FSA staff are moved from frontline oversight to policy work.

Mr Sants admitted this would cause a "marginal increase in the probability of a risk crystallising for our lower impact firms". He also pointed out that the new Prudential Regulation Authority (PRA), which will work closely with the CPMA, would allow business to fail.

"The PRA will not be attempting to pursue a 'zero failure' regime. Persuading society that this is an acceptable goal will be a challenge," said Mr Sants.

On the recent furore over the FSA's decision not to publish the results of its 18-month investigation into the collapse of Royal Bank of Scotland, Mr Sands admitted he was "sympathetic" to the arguments, but said the regulator required the permission of the firms and individuals that helped its enquiries to make the report public.

"If we did have such permission, I would be sympathetic to the idea we should publish such a report," he said, but added it would take "several months" to prepare a public document.